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WASHINGTON, July 29 (Reuters) - The U.S. economy contracted at a record average annualized rate of
19.2% from its peak in the fourth quarter of 2019 through the second quarter of 2020, government data
showed on Thursday, confirming that the COVID-19 recession was the worst ever.

The pace of recovery from the pandemic downturn, the deepest going back to 1947, was equally stunning.
The Commerce Department's Bureau of Economic Analysis said gross domestic product rebounded at a
historic average rate of 18.3% between the second and fourth quarter of 2020.

Mandatory shutdowns of nonessential businesses in March last year to slow the first wave of coronavirus
infections left the economy reeling, throwing a record 22.362 million people out of work. The government
provided nearly $6 trillion in pandemic relief, while the Federal Reserve slashed its benchmark overnight
interest rate to near zero and is pumping money into the economy through monthly bond purchases.

The National Bureau of Economic Research, the arbiter of U.S. recessions, declared last week that the
pandemic downturn, which started in February 2020, ended in April 2020.

Massive fiscal stimulus, the Fed's ultra-easy monetary policy and vaccinations against COVID-19 have
allowed economic activity to resume, with GDP pulling above its pre-pandemic level in the second quarter.
The government also said the economy shrank 3.4% in 2020, instead of 3.5% as previously estimated.
That was still the biggest drop in GDP since 1946.

Revisions to growth in other years and quarters were minor. From 2015 to 2020, GDP increased at an
average annual rate of 1.1%, unrevised from previously published estimates.

The BEA said in 2018 it had fully addressed a methodology problem, or residual seasonality, which
analysts had argued tended to understate economic growth in the first quarter.

While growth likely peaked in the second quarter, economists see GDP increasing around 7% this year,
which would be the strongest performance since 1984.

The International Monetary Fund on Tuesday significantly raised its growth forecasts for the United States
to 7.0% in 2021 and 4.9% in 2022, up 0.6 and 1.4 percentage points respectively, from its forecasts in April.
 Commentary

The articles discussed the contraction in the U.S economy, at a record average annualized rate of 19.2%,
during COVID-19 pandemic recession. Recession is defined as two or more consecutive quarters of
negative GDP growth. The key concept of economic well-being will be discussed in this commentary.
Economic well-being refers to the level of prosperity and the quality of living standards enjoyed by members
of an economy.

As mentioned in the articles, the COVID-19 recession was the worst ever, and as a consequence, 22.362
millions people were unemployed (people of working age who are without work, available and seeking for
work). This can be shown in diagram 1. This type of unemployment is known as cyclical unemployment.
Cyclical unemployment is associated with cyclical downturns in the economy. When the economy slows
down, aggregate demand is likely to fall. And to reduce their output, firms will reduce their demand for
labour.

The current level of output in the U.S is determined by the intersection of aggregate demand, AD and
short-run aggregate supply, SRAS. Aggregate demand is the total demand for goods and services
produced in an economy. The position of AD is determined by the level of consumer spending, government
spending, investment and Net exports in an economy. Given the outbreak of COVID-19, and shutdown of
non-essential businesses, aggregate demand is deficient. The recessionary/deflationary gap in the economy
suggests that the economy is not functioning at full employment due to the pandemic, and therefore have
laid off workers due to lower production. The state of the economy will continue to deteriorate until it is
resolved. The overall economic activity must increase to achieve the target growth rate of 7% in 2021 and
4.9% in 2022.

While there is a difference between recession and economic well-being, there is a certain connection.
When the economy is in recession, as a consequence the rate of unemployment increases. Therefore
those who were thrown out of work will not be able to meet their basic needs and it will eventually reduce
their standard of living. This means they will not be financially secure in the present and future. Economic
well-being is an important concept to consider when implementing policies to solve recession so that
people can obtain financial security now and in the future.

In order to escape the recession, the government increases the aggregate demand. As mentioned in the
article “The government provided nearly $6 trillion in pandemic relief, while the Federal Reserve slashed its
benchmark overnight interest rate to near zero and is pumping money into the economy through monthly
bond purchases”. These policies are known as Expansionary fiscal and monetary policy, respectively. This
is shown in figure 2. When the reserve bank cuts interest rates near zero, it becomes cheaper for business
and consumers to borrow money hence increasing both consumption and investment. In addition to this
there would be an increase in government spending . Therefore, the aggregate demand will shift from AD1
to the right to AD2. Companies will increase production in response to growing demand. Hence
unemployment falls and wages rise because of an increase in demand for labour. Higher wages would
mean higher production costs, so the average price level will rise from P1 to P2. In the long run the U.S
economy will reach full employment where LRAS intersects AD2, with an increase in GDP from Y1 to Y2.
Fiscal and monetary policy would allow economic activity to resume.
When the central bank slashed interest rates near zero the rate of return on savings will fall, and worse if
inflation is higher than the nominal interest rate in the economy, then the real return on savings could be
negative, which is not good news for people with savings. Falling interest rates would also mean “hot
money”, it is the flow of funds from one country to another in order to earn profit on interest rate difference.
This happens because savers find it less beneficial to keep their money in a U.S bank. Furthermore when
the government implements a fiscal policy, it takes a lot of time in comparison to monetary policy to fully
increase aggregate demand. In addition, demand pull inflation occurs as a result of increase in aggregate
demand. The increase in aggregate demand from AD1 to AD2 “pulls up ” the average price level from P1 to
P2. Here we have a conflict of macroeconomic objects that is not desired at the current state of the
economy (High Rate Of Inflation).

In conclusion, the use of fiscal and monetary policy will help the U.S economy to recover from one of the
worst recession and will also significantly increase the growth forecast of the U.S GDP in 2021 and 2022.
The increase in government spending in vaccination will allow businesses to reopen, due to which there will
be an decrease in unemployment rates, as demand for labour increases.

Bibliography (MLA7 Citation):

Blink, J. and Dorton, I., 2020. Oxford IB Diploma Programme: IB Economics Course.
Draw.io. 2021. Flowchart Maker & Online Diagram Software. [online] Available at:
<https://www.draw.io/> [Accessed 11 August 2021].
U.S. economy contracted 19.2% during COVID-19 pandemic recession | Reuters